What Should Be Your Stance on Bank ETFs Before Earnings Releases?

It’s time for full-fledged releases of quarterly earnings. Big banks will start reporting from this week. This time the season would be more crucial given the tariff-induced market volatility. During each earnings release, management rhetorics would be followed closely to gauge the future stock movement.

While it's a known fact that banks are not directly affected by tariffs, their fortunes are tightly linked to the broader economy, which is thought to be falling into a recession in the medium term, by some market experts. As cyclical businesses, banks thrive during periods of economic expansion and suffer during downturns.

Although stocks recorded one of their biggest one-day rallies on April 9 since World War II due to the tariff pause — with the S&P 500 having its best day since 2008, gaining 9.5%—uncertainty still remains. The Nasdaq Composite posted its second-best day on record on April 9, 2025.The move came after Trump announced a 90-day suspension of most 'reciprocal' tariffs on other countries.

Falling U.S. Growth Outlook If Tariff Tantrum Resumes

The persistent uncertainty around tariffs has led to growing fears of a slowing economy, with many economists increasing recession probabilities and lowering their GDP growth forecasts. Goldman Sachs Group Inc. economists led by Jan Hatzius lowered their 2025 Q4-to-Q4 GDP growth forecast to 0.5% from 1% and raised the 12-month recession probability to 45% from 35%, according to a research note dated April 6. 

The Federal Reserve itself cut the US GDP outlook. The Fed now expects the economy to rise by 1.7% this year, down from an estimate of 2.1% in December.The U.S. central bank also revised down their projections for GDP growth in 2026 and 2027, to 1.8%. This could create tougher times ahead for financial institutions.

Slowing Loan Demand and Deteriorating Asset Quality

Economic softening tends to reduce the demand for credit, while also increasing the likelihood that existing borrowers may default on loans—both problematic for banks.

Although the Federal Reserve’s monthly data shows a modest pickup in loan activity through the first three months of 2025 — especially in commercial & industrial (C&I) loans and home equity loans—investors remain skeptical about the sustainability of this trend in a weakening macro environment.

Areas of Pain

On the asset quality front, commercial real estate (CRE) challenges are already well-known and largely accounted for in the major banks’ provisions. However, beyond CRE, overall U.S. bankruptcies have climbed significantly from their 2022 lows, though that growth appears to be stabilizing.

Of all the areas within banking, the investment banking segment appears to be the hardest hit by shifting market sentiment. Despite management teams consistently pointing to strong deal pipelines, actual deal-making activity has yet to rebound meaningfully. The tariff situation would make the matter even worse.

Inside the Expected Earnings Picture

Let’s dig deeper into the likely earnings picture of the big six banking companies that could drive the performance of the sector ahead. For the Finance sector, total Q1 earnings are expected to be up 1.8% on 2.8% higher revenues. This would follow the sector’s 17.4% earnings growth on 7.7% higher revenues in 2024 Q4, per the Earnings Trends issued on April 4, 2025.

The Zacks Major Banks industry is projected to report a 0.7% increase in earnings for Q1 2025, with revenue growth of 5.3%. Notably, this group contributed roughly half of the total earnings for the Zacks Finance sector over the last four quarters. All six big bank stocks hail from a top-ranked Zacks Industry (top 34%).

According to our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), when combined with a positive Earnings ESP, increases our chances of predicting an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Inside Our Surprise Prediction

Among the big six, Citigroup Inc. C is likely to report on April 15. At the time of writing, Citi has a Zacks Rank #3 and an Earnings ESP of +0.26%. When you combine this positive Earnings ESP with the stock's Zacks Rank #3, it shows that a beat is possibly around the corner.

Zacks Rank #3 JPMorgan Chase & Co. JPM is likely to report on April 11. It has an Earnings ESP of +0.74%.

On Apr 11, Wells Fargo & Company WFC, with a Zacks Rank #3 and an ESP of +2.03%, will report earnings results. The combination does make WFC a good candidate for an earnings beat.

Bank of America Corporation BAC is expected to report on Apr 15. The stock has a Zacks Rank #3 and an ESP of +1.29%. Needless to say, here, too, surprise prediction has a positive inclination.

On April 14, Goldman Sachs Group Inc. GS is likely to come up with its earnings release. Goldman has a Zacks Rank #3 and an ESP of +0.89%.

On April 15, Morgan Stanley MS is likely to come up with its earnings. Morgan Stanley has a Zacks Rank #3 and an ESP of 0.00%. The combination makes the prediction tough.

Attractive Valuation

Despite their strong performance over the past year, big bank stocks remain attractively valued by conventional metrics. The Zacks Major Banks industry is currently trading at 61% of the S&P 500’s forward 12-month P/E ratio. Over the past decade, this ratio has ranged from 52% to 78%, with a median of 62%.

Bottom Line

The health of the banking sector looks moderately sound, apart from some pain points. If the economy worsens, those pain would aggravate. And if the economy can manage the tariff-driven threat, we should see smooth sailing in exchange-traded funds (ETFs) like Financial ETFs like iShares U.S. Financial Services ETF IYG, iShares US Financials ETF IYF, Invesco KBW Bank ETF KBWB, Financial Select Sector SPDR XLF and Vanguard Financials ETF VFH.

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This article originally published on Zacks Investment Research (zacks.com).

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